A holding company is a company that has controlling shares in various companies. It doesn’t involve in the day-to-day operations of its subsidiaries, instead supervises them. The holding also has an interest in selecting the board of directors of subsidiaries.
Holding has a different management structure from the subsidiary. Although subject to tight controls, subsidiaries often have considerable autonomy.
Good about holding company
- Doesn’t require a significant investment. To acquire a company, a holding does not need to buy 100% of its shares. By buying at least 51%, the holding can control the target company.
- Having limited liabilities. If a subsidiary goes bankrupt, creditors often do not pursue the parent company because they are a limited liability. I mean, the holding isn’t liable to the subsidiary’s debt.
- Business diversification. Gains in one subsidiary compensate losses in other subsidiaries.
- Unstable. Holding must oversee companies with different cultures and businesses. Sometimes, subsidiaries operate in various unrelated businesses.
- Manipulation of inter-company transactions. Holding might run a transfer pricing to transfer tax obligations to low-cost tax jurisdictions. It violates the law in some jurisdictions.
- The interests of minority shareholders in a subsidiary may not be adequately protected.
- The holding company shareholders may unaware of the correct financial position of the subsidiary.